February 3, 2010

As Sales Drop, Burger King Draws Critics for Courting ‘Super Fans’

For five years, Burger King Holdings Inc. was on a roll, successfully courting its “super fans”—18- to 34-year-olds who account for half of all visits to Burger King restaurants.

Thanks to high unemployment and healthier eating habits, those super fans haven’t been so super lately. Burger King has felt the impact more acutely than its main rival, McDonald’s Corp., whose sales are growing.

As Burger King prepares to report earnings this week after two straight quarters of same-store sales declines, the question is whether the chain has relied too heavily on customers that may be permanently changing habits.

Former super fan Noah Rubin says he has. The 28-year-old Seattle man used to wolf down bacon cheeseburgers three or four nights a week at Burger King, Jack in the Box and local bars. But he and his fianceé started cutting back last year after both were laid off, then found jobs at lower pay.

Now they cook at home using organic vegetables and dine out only on weekends. Mr. Rubin figures he is saving more than $100 a week by eating fewer burgers. “I don’t think we’ll go back to eating out as often as we used to,” he says. “We always used to talk about eating at home more, and now that it’s happened, we’ve found that we really enjoy it.”

Burger King’s same-store sales in the U.S. and Canada declined 4.6% in the three months ended Sept. 30, while McDonald’s posted U.S. same-store sales growth of 2.5%. North American same-store sales at Wendy’s, a unit of Wendy’s/Arby’s Group Inc., fell 0.1% in the quarter ended Sept. 27. At CKE Restaurants Inc., parent of the Hardee’s and Carl’s Jr. burger chains, company-run restaurants saw sales decline 3.7% in the quarter ended Nov. 2.

Some Burger King franchisees and industry analysts say the company’s marketing and advertising focus on super fans alienated women, children and other customers. “Maybe catering to the super fan was the correct strategy to kick-start the business, but maybe they relied on that for too long,” Morgan Stanley analyst John Glass says

Brian Gies, Burger King’s vice president of marketing impact, says, “There’s no question that, broadly speaking, this recession probably will change the way many people will spend going forward. We can’t quantify what the impact will be for fast-food hamburger restaurants, but we’re on the lower end of the affordability spectrum, and we stand a pretty good chance of remaining part of the super fans’ repertoire.”

To keep those customers coming, Burger King last year started offering a double cheeseburger for a dollar—to the chagrin of franchisees, some of whom sued the company, claiming the price reduction cut their profits. Mike Kappitt, Burger King’s senior vice president of global business intelligence and strategy, says the company is pleased with the cheeseburgers’ sales and plans to continue courting super fans.

Six years ago, after years of slumping sales, Burger King decided to focus on the group that spends the most money at its restaurants. These young men and women visit fast-food burger chains on average almost 10 times per month, the company says.

Burger King tried to distinguish itself from rivals by addressing young men, in particular, like “the cool uncle who tells you how it is,” says John Schaufelberger, Burger King’s senior vice president of global product marketing and innovation.

The chain ran irreverent television and online ads featuring its big-headed King character, which some people found cool and some found creepy. Some ads offended Hindus, Mexicans and women. An advertisement for Burger King’s Texican Whopper featuring a small wrestler dressed in a cape resembling a Mexican flag drew the ire of Mexico’s ambassador to Spain. The company also drew fire for its “SpongeBob Square Butts” ad, which featured the King Mascot dancing alongside women with squared-shaped butts. Franchisees pleaded with Burger King executives to woo more mothers and children by toning down the ads and bolstering kids’ and breakfast offerings.

“We had multiple marketing meetings where we bemoaned that our kids’ meal sales had dropped dramatically, and that we didn’t have a dessert program, and the company said, ‘This is the way we’re doing it,’ ” says Julian Josephson, who owns 40 Burger Kings in the West and Southwest.

Company officials acknowledge some franchisees have been critical but say others have embraced the super fan plan. The chain posted 20 consecutive quarters of same-store sales growth in the U.S. and Canada through its fiscal third quarter of 2009, which ended last March 31.

Then came the two quarterly declines. Burger King doesn’t disclose traffic by demographic group, but said in its last quarterly earnings release that the decline was “driven by continued adverse macroeconomic conditions, including record levels of unemployed and underemployed workers, especially super fan customers.”

David Tarantino, restaurant analyst with Robert W. Baird & Co., is expecting Burger King’s global same-store sales to be down 1.8% in the latest quarter and for the company’s same-store sales in the U.S. and Canada to be down 3%. That would be a slight improvement over the last quarter, thanks largely to sales of the $1 double cheeseburgers.

On average, 18- to 34-year-olds went to fast-food chains about 13 times per month from January to September 2009, down from almost 19 times per month in 2006, says market-research firm Sandelman & Associates.

The economy isn’t the only culprit. People 18 to 34 cut their consumption of fast-food meals from November 2006 to November 2009 while increasing the number of meals they ate at fast-casual chains, says Bonnie Riggs, restaurant industry analyst at market-research firm NPD Group.

“Young people are looking for healthier options, or what they perceive to be healthier options,” she says. “Do I think they’ll come back to fast food when the economy improves? Yes…but will they visit as often? I’m not so sure.”

Jason Carpenter, 24, of Tinley Park, Ill., says he used to visit burger chains a few times a week until early last year. “I realized it was pointless to do all this exercising and then go and eat all these burgers,” says the benefits programmer for a consulting company.

Now he cooks at home more, and when he does go out, he favors sandwich shops or fast-casual chains that he says offer healthier food. “On occasion, I’ll hit Wendy’s or McDonald’s,” he says, “but I try to stick with Subway or Panera.”